Avary Holding(Shenzhen)Co (SZSE:002938) Will Want To Turn Around Its Return Trends

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Avary Holding(Shenzhen)Co (SZSE:002938) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Avary Holding(Shenzhen)Co is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.13 = CN¥3.8b ÷ (CN¥41b - CN¥12b) (Based on the trailing twelve months to September 2023).

So, Avary Holding(Shenzhen)Co has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.3% generated by the Electronic industry.

Check out our latest analysis for Avary Holding(Shenzhen)Co

Above you can see how the current ROCE for Avary Holding(Shenzhen)Co compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Avary Holding(Shenzhen)Co .

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 19% five years ago, while capital employed has grown 76%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Avary Holding(Shenzhen)Co probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line

In summary, we're somewhat concerned by Avary Holding(Shenzhen)Co's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 15% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 1 warning sign with Avary Holding(Shenzhen)Co and understanding it should be part of your investment process.

While Avary Holding(Shenzhen)Co may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.